You’ve heard financial experts say it again and again. Building an emergency fund is the starting point of financial freedom. In fact, emergency funds should no longer be an option but a necessity every consumer should strive to have.
What is an emergency fund?
An emergency fund, as the name suggests, serves like a cash reserve you’ve set aside for unexpected expenses and emergencies. Especially in today’s volatile financial market, you cannot take chances anymore when it comes to your finances. What if you lose your job? What happens if you have a medical emergency that your insurance does not cover? How about if your car unexpectedly broke and you have no cash for repair?
These are unexpected circumstances you do not wish to happen but still needs to prepare for any way just in case. An emergency fund is exactly the type of fund that can cover these bases for you.
How much do you need?
To know how much emergency fund you’ll need to save up for, the first thing to do is figure out how much you spend each month. This should include all expenses such as utility bills, food, rent if applicable, clothing, transportation and etc.
As a rule of thumb, experts recommend that consumers aim to save up three months’ worth of your monthly expenses. Three months should be ample time for you to get back on your feet again after an unexpected financial situation.
How to start saving for your emergency fund?
Now that you know how much you need for your emergency fund to be enough, the next step is to devise a plan on how to achieve your fund goals. The trick is to save up as soon as you can start with the most comfortable amount you can set aside.
For example, if you can only manage to save 5% of your income for the emergency fund, start with that. Gradually increase it as you go along and you’ll have enough in no time. Make sure your fund is easily accessible. After all, this fund is designed specifically for emergencies. Putting it on a savings account or a money market fund is a good idea.